In the previous post we discussed why digital financial advice, often referred to as “Robo Advice”, is here to stay and how it can benefit both the unadvised market (those who don’t see a financial adviser) and the advised market (where it can benefit the financial advisers themselves, as well as their clients).

Today we will take a look at what digital financial advice tools are available and what are the licensing requirements for their providers.

Digital Financial Advice tools fall into three broad categories:

Investing: Online applications aimed at simplifying the investment process and lowering the cost of investing. Some of these may also offer recommendations as to an “appropriate” investment portfolio, based on limited information about assets, income, goals and tolerance for short term volatility eg Stockspot. Others do not, they are purely oriented around the process of investing eg Macrovue. Either way, these must be provided under an AFSL.

Administration: Some online applications are oriented around administration of superannuation, in particular self-managed super funds eg eSuperFund. These may facilitate the purchase or holding of financial products eg deposits, bonds and shares, which require a limited or full AFSL.

Strategy: Some online applications provided advice on investment and/or insurance strategy eg Investfit. Whether or not provision and use of these online applications requires an AFSL depends on the nature of the “advice” and the nature of the application itself. Some exemptions from the need to hold an AFSL include:

  • where the application is a type of financial calculator and the user is able to use their own economic assumptions (eg investment returns, inflation etc) [Class Order [CO 05/1122]]
  • where the “advice” offered is purely in relation to how best to allocate investments across the different asset classes (cash, bonds, property, shares etc) [CORPORATIONS REGULATIONS 2001 – REG 7.1.33A]

It may seem odd that the most powerful tools i.e. those that have the biggest potential to improve people’s retirements – such as Investfit – may not require an AFSL. In fact this primarily reflects the fact that the main function of licensing is to protect clients from unscrupulous activities, conflicts of interest, incompetence and mismanagement. Having said that, it is our view that all online financial applications that focus on investment strategy should be built by financial experts and should be independently reviewed and verified. For example, Investfit was developed by an actuary and financial risk management professional and reviewed and verified by the University of Technology, Sydney.